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Alibaba’s Peak Season Misses the Peak

(Bloomberg Opinion) -- Alibaba Group Holding Ltd.’s December quarter is supposed to be the big one.

For the past five years, the Chinese e-commerce company has posted its biggest sales during what is its fiscal third quarter. Profit margins have tended to follow suit.

Revenue declines and narrowing margins since the start of 2018 could have been dismissed, or at least forgiven, for the fact that they happened during “less important” earnings periods.

But the disappointment continued right through the final innings of calendar 2018. Sales climbed 41 percent, the slowest rate since 2016. Its key division, core commerce, grew by just 40 percent, the least since Alibaba started breaking out those numbers three years ago.

Bulls will be heartened by the fact that operating profit rose 3 percent; after all, this metric dropped in the prior three quarters. Yet operating margin during the peak season was at the lowest in at least seven years. Alibaba’s hopeful new businesses — cloud, digital media & entertainment, and innovation initiatives — all continued to weigh on the bottom line.

Executives have become well-versed at explaining away this margin erosion — be it due to consolidation of subsidiaries, higher costs to drive new businesses, or spending on streaming content.

No doubt some of these new arenas will start to pay off and margins will inch up again. But at some point management, and investors, will need to admit that the rice and salad days are over, with slower top-line growth and skinnier profits becoming the new norm.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.